In the coming weeks, Congress will begin hearings to address the GameStop frenzy that hit the market two weeks ago, when a band of casual traders on Reddit pushed up the company’s stock price so hedge funds who bet on the price going down would lose billions.
Melvin Capital, one of the hedge funds that heavily shorted GameStop’s stock price, lost 53 percent in January, according to CNBC, after the stock price rose from $18 to $347 in the span of a week.
“I started seeing conversations about short squeezing,” said Christian Pluchino, a 27-year-old investor, who subscribes to the Reddit thread WallStreetBets. “I didn’t know what any of that meant. I just thought maybe GameStop is going to go up.”
Pluchino only started investing in March as a way to boost his income during the pandemic. He says in November, he started seeing posts from the Reddit user RoaringKitty, who regularly posts about his investing positions. He posted a Reddit thread noticing the short positions hedge funds were taking on GameStop, betting that the stock price would fall in a certain amount of time.
Through the power of the Internet, other Redditors started following along and purchasing GameStop stocks, pushing the price up so high that Melvin Capital and other hedge funds had to sell their positions to cap their losses, while those who invested stood to make thousands.
“Usually, we think about market manipulation by some business entity, which has market power, but here it’s different because you don’t have a single mind behind it. You have a collective,” said Oleg Baranov, an economics professor at the University of Colorado Boulder who specializes in market design.
Baranov says what happened with GameStop will likely lead to regulations on the market. Legislators from both sides of the aisle have commented on the frenzy, saying it highlights what hedge funds do: fluctuate stock prices with large investments.
For investors, Baranov says there will likely also be changes.
“Potentially slowing [the market] down will help. If it doesn’t go as fast, potentially you won’t have this effect where the price keeps rising and rising and rising,” he said.
Experts have said that potentially putting a time limit on how soon a stock can be sold after purchase could achieve that effect. They say day trading has been around since the inception of the market but adds its prevalence changes the intent of the market from long-term investing to gambling.
“It’s a dangerous weapon,” said Baranov.
That is not to say those changes will happen but could in an age where market trading has new tools, such as the Internet, at its disposal.
